HMRC’s VAT penalty and interest rules

HMRC introduced new VAT penalty and interest rules in 2023 but there have been recent updates following the 2025 Spring Statement.

Background to the VAT penalty and interest rules

HMRC introduced a ‘new’ penalty and interest regime for VAT in 2023. This article summarises the key points of this regime and details the recent changes.

The current penalty regime applies to VAT periods beginning on or after 1 January 2023, with the updates coming into effect as follows:

• 1 April 2025: increase to late payment penalties
• 6 April 2025: increase to late payment interest.

Late payment penalties

The late payment penalty applies in instances where the return is submitted on time but the payment is not. This penalty considers the length of the delay in making payment and the penalty increases over time.

Requesting a time to pay (TTP) arrangement will stop penalties accruing from the date of the request, but only if the arrangement is eventually agreed by HMRC and it is being honoured by the taxpayer.

Please see below a summary of the penalties chargeable for late payment of VAT returns:

HMRC will have the discretion to reduce or not charge a penalty for late payment, including where the taxpayer has a reasonable excuse.

The key point is that HMRC is looking for taxpayers to approach them as early as possible to agree any TTP arrangements if VAT liabilities cannot be paid. The penalties increase the longer the taxpayer delays this.

Late payment interest (LPI)

LPI will be charged on tax outstanding after the due date, starting from the date the payment was due until is it received by HMRC in full. LPI is calculated as simple interest at a rate of 4% above the Bank of England base rate. (This was 2.5% prior to 6 April 2025). Whilst this is an interest charge, the increase to the rate applied will make it feel like a penalty to some.

Where tax is overpaid, repayment interest will be paid by HMRC on any tax due to be repaid from the later of either:

1. the last day the payment was due to be received
2. the day it was received.

Repayment interest will be paid at the Bank of England base rate less 1% (subject to a 0.5% minimum).

It is important to note that LPI will continue to apply even where there is a TTP arrangement in place.

Late submission penalties

HMRC will award a point for every missed VAT return submission deadline. Once a taxpayer meets a set points threshold, HMRC will charge £200 for that failure. HMRC will then charge a further £200 for each VAT return not submitted on time, although the number of points will not increase. There will be separate points totals for VAT and ITSA.

The points thresholds are:

In practice this means that a taxpayer filing a quarterly return can miss a submission deadline three times, but on the fourth missed deadline a £200 penalty will be charged. A further £200 is then charged for any subsequent defaults whilst the taxpayer remains at that penalty threshold.

Penalty points have a lifetime of two years, after which they will expire. The two year period is calculated from the month after the month in which the failure occurred, e.g. if the submission is due March 2025, the penalty point will expire in April 2027.

Once a taxpayer reaches the threshold, all points accrued will be reset to zero when the following conditions are met:

1. a period of compliance takes place, and
2. the taxpayer has submitted all VAT returns in the previous 2 years (even if the returns are submitted late).

The period of compliance is:

Again, this means that a taxpayer on quarterly returns, that has filed any outstanding returns and met the submission deadlines within a twelve month period, will lose any penalty points accrued.

There will also be time limits after which points cannot be levied:

HMRC can only assess a penalty within two years after the failure giving rise to the penalty occurs. HMRC also has at its discretion the ability to not apply a penalty in the first place where the taxpayer has a ‘reasonable excuse.’  

Key points:

• submit the VAT return by the due date, even if you cannot afford to pay as this mitigates the late submission penalties
• late submission penalties will reset upon good compliance over a period of time
• where you cannot pay the liability by the due date and you need extra time, contact HMRC at the earliest possible opportunity to agree a TTP arrangement. The longer it takes to do this, the higher the late payment penalty will be.

If you would like to discuss the VAT penalty regime, please contact Robert Marchant, or your usual Crowe contact.